What To Do with Your 401(k) After Quitting Your Job
People do not leave companies. They leave bad managers (individuals).
I'm at a crossroads.
I have put my job ahead of everything else, literally NOT figuratively.
I can't remember the last time I took a full day off.
Even when I take a so-called vacation day, I am putting in damn near a full day's work at the office in my home.
Do you actually mean evenings, weekends, and holidays?
Yes, all of the above. No exaggeration.
I am obsessively committed in knowing that one day I will reap what I sow and be recognized for going above and beyond the call of duty every single day without being asked to do so and without complaint.
Because this is simply how I am wired. I go ALL IN or I don't go in at all. From every job I ever held, this is the only way I know how to operate.
But then some strange things begin to happen.
It becomes clear that you do not have as much [autonomy] as you had originally thought.
Somehow your tireless work ethic (no days off, literally) seems to go unnoticed.
Your input on critical decisions that directly impact your area of responsibility is not taken into consideration.
This realization hits you like a ton of bricks.
You sleep on it for a few days and you arrive at the [devastating] conclusion that it is in your best interest to move on.
But wait a second. What the hell am I supposed to do with that thing called a 401(k) once I leave the old job? I mean, does it just disappear or what?
Nope, it doesn't just disappear. Here are your options...
Leave It With Your Former Employer
Many employers will allow you to leave your 401(k) where it is. However, some employers may force you out, more notably if you have less than $5,000 invested. It may be a good idea to leave your 401(k) where it is if you have accumulated a substantial amount and have been pleased with the performance of your investments.
Keep in mind that you will have limited options as compared to rolling it over to an IRA if you do decide to leave your 401(k) with your former employer.
More importantly, do not FORGET about your 401(k) account because it is YOUR money.
Roll It over to Your New Employer
Check with your new employer to verify if they offer a 401(k) plan and your eligibility. Some employers will require you to work a certain number of days before you are eligible to participate. Once you have confirmed your new 401(k) plan, it is fairly easy to execute a rollover from your previous employer into your new plan.
You will simply need to fill out some paperwork to execute a direct rollover from the previous custodian to your new custodian.
This will also ensure that you avoid any tax penalties.
Roll It Over Into an IRA (individual retirement account)
There is another good option available if your new employer does not offer a 401(k) or if you want to move your assets elsewhere for more control.
In this case, you can choose whatever financial institution you want to execute a direct IRA rollover. The biggest advantage with this option is that you are not restricted to the limitations of an employer-sponsored 401(k).
In other words, you can invest how, when, and in whatever investment vehicle you choose to be the best fit for your specific generational wealth-building strategy.
However, keep in mind that there are some restrictions that come along with the functionality of an IRA as with anything else, especially with state-specific regulations.
You can begin taking distributions from your 401(k) without incurring a 10% tax penalty if you are over the age of 59 1/2. Your distributions will be taxed as ordinary income if you are drawing from a traditional 401(k). On the other hand, your distributions will be tax-free if you have a Roth 401(k) that has been open for at least five years.
It will be a good idea to consider taking distributions at this time if you are entering retirement.
Cash Out the Plan
Of course, you can also cash out your 401(k) and run, but this option is generally not recommended for several reasons.
First of all, you will incur an early withdrawal fee if you have not yet reached retirement age. In addition, you will also have to pay hefty federal, state level, and local taxes on top of each other depending on your geographical location which will remove a big chunk of your lump-sum withdrawal.
Most of all, you will lose the time-value of growth and compound interest accumulation if you cash it out in one lump sum.
You will find yourself having to start from scratch and will most likely regret it later on. Take on a 2nd part-time job, reduce your monthly expenses, cut back on eating out, and do whatever is necessary to avoid cashing out your 401(k) in a lump sum.
In closing, at the very least, ensure that you weigh out the pros & cons of each available option and carefully consider the opportunity cost for each avenue of approach.
As always, before you make any investment decisions, identify where you are today in terms of your net worth/monthly-cashflow, clearly define where you want to go, and then decide on the best plan of action to get there.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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